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Deciding fair value under pre-emption provisions in a company's articles

Deciding fair value under pre-emption provisions in a company's articles

April 7, 2016

A recent High Court decision involved interpreting the pre-emption provisions in a company's articles. In particular, the court had to consider the basis on which the appointed accountants should value the shares which the defendants wished to transfer.

Facts

The defendants were minority shareholders with a combined shareholding of 22% in the capital of each claimant company. As required by the pre-emption provisions in the companies' articles of association, they gave notice of their intention to sell their shares. Disagreement arose between the parties over whether it was correct to value each minority shareholding as a block (which might involve a minority discount) or on a per share basis. There was also disagreement over what information the accountants should receive to make their valuation.

The key part of the pre-emption clause which was relevant to both these points was as follows:

"The "prescribed price" shall be such sum per share as shall be agreed between the Vendor and the Company failing which it shall be the median price of the prices as determined and certified in writing by two independent chartered accountants as being in their opinion the fair value thereof as between a willing buyer and a willing seller valuing the Company on a going concern basis …the said chartered accountant when determining and certifying the fair value of the Transfer Shares as aforesaid shall act as an expert and not as arbitrator…"

Decision

On the valuation issue, the court agreed with the defendants. The court held that the language of the clause was consistent with a per share valuation and not a block valuation. The "thereof" in the wording related to an individual share and not the "Transfer Shares". The reference later in the drafting to the "Transfer Shares" did not displace this interpretation. The court also rejected the claimants' argument that the notional transaction between a willing buyer and a willing seller referred to in the drafting required a block valuation.

On the information issue, the claimants argued that the accountants should only receive publicly available information. Their argument was that, absent special arrangements, shareholders and outside third party buyers only have access to publicly available information. As the drafting referred to a transaction between a notional "willing seller" and a notional "willing buyer" and was silent about information, the accountants could only rely on the information that would be available to those notional parties.

The defendants, on the other hand, argued the claimants had to provide the accountants with any information that the accountants might reasonably request. This was necessary to make the pre-emption provisions workable and to conform to the well understood process of expert resolution.

The court agreed with the defendants on this issue too. It held that the correct interpretation of the drafting was that it was for the accountants to decide what information they required to carry out their task. Alternatively, it was correct to imply a term to that effect. The court noted that, in previous cases on pre-emption clauses, the courts had consistently made clear that, when assessing "fair value", it was for the valuer to consider all relevant circumstances. The courts had avoided restricting those circumstances.

Comment

While the decision is unsurprising, it offers a useful reminder of the need to be clear about the basis of valuation in pre-emption provisions and about what information is taken into account.

In the judgment, the court reviewed and summarised the general principles of interpretation which apply to articles. The court noted that articles of association are a statutory contract between the members and between each member and the company. They must therefore be interpreted using the ordinary principles that apply to interpreting contracts. On the issue of when it is permissible to imply a term into a contract, the court applied the recent Supreme Court decision in Marks and Spencer plc v. BNP Paribas Securities Services Trust Company (Jersey) Limited & Anor [2015] UKSC 72. In that case, the Supreme Court clarified that for a term to be implied it must be necessary for business efficacy or, alternatively, be so obvious as to go without saying.

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